David Thompson, Product Development Manager at Little Pear, has asked you for advice regarding a cash flow-related business decision.

David advises that one of Little Pear's strategic and operational plans is to streamline and coordinate the production process to increase product turnover within the next 2 years. He would like to purchase new equipment that is safer, more energy efficient, and more economical. The cost reduction is expected to make production smoother and cheaper, allowing Little Pear to produce quicker.

David is preparing a business case to support the acquisition of the new equipment. He needs your calculations, advice on cash flow, and an explanation of the tax implications relating to the proposal.

The project details are:

Capital Outlay	$100,000
Cash Income p.a.	$59,000
Cash Expenses p.a. (other than tax)	$19,000
Depreciation p.a.	$10,000
Economic Life	10 years
Salvage Value	Zero
Tax Rate Payable (paid in year of income)	30%
Required Rate of Return	20%
Required Payback Period	4 years

Using the above information, calculate the following.

A) The Net Profit after Tax for all years and the Annual Cash Flow.

	$
Cash Income
Cash Expenses
Depreciation
Sub-total
Tax @ 30%
NPAT
Depreciation
Annual Cash Flow

B) Accounting Rate of Return (using initial investment).

C) Payback Period.

D) Internal Rate of Return (IRR).

E) Net Present Value (NPV).

Question 2 below:

Little Pear's organizational policies and procedures require all financial analysis to be documented in a report.

Review the information about Little Pear's objectives and the results from question 1. Arranage a short report for David on the financial analysis completed.

Report should include:

• the results of your analysis
• your recommendation based on the required rate of return, if the project be accepted or rejected
• your recommendation based on the payback period, if the project be accepted or rejected.

Question 3 below:

David has asked you about the tax issues related to the equipment purchase. He has heard new tax rules may allow Little Pear to deduct the full purchase amount upfront. Under Little Pear's organizational policies, a Registered Tax Agent must provide all tax advice.

Tony Jones is a Registered Tax Agent at your firm. Arrange an email to Tony seeking advice on the tax issue.